Wednesday, December 28, 2016

Have You Reviewed Your Lease Maintenance Processes Lately?

You might conclude that the but-for-the-grace-of-God-that-could-be-me nightmare presented in In re: RPH Capital Partners is instructive only for lawyers. If so, you would be mistaken. The lesson: If you want to win the lawsuit, pay attention to pesky legalities such as notices of trial settings. Likewise, if you want to protect your hydrocarbons, reinforce your people and processes for maintaining leases and other significant obligations.

RPH sued Peridot and others for failing to make payments under a participation agreement and for selling interests in properties they didn’t own. The defendants didn’t appear for the trial. A default judgment for $13 million was taken.

After RPH began garnishing bank accounts Peridot filed a petition for bill of review, contending it never received a copy of the judgment. Peridot had only 38 days’ notice of the trial (the law requires 45), so Peridot argued it was deprived of its due process rights. The trial court ordered a new trial.

Everyone agreed that Peridot did not receive enough notice of the trial, but was the notice so insufficient that it was a violation of fundamental due process rights? No. Peridot waived that complaint when it took no action after it received less than 45 days’ notice.

The case then turned to whether Peridot’s failure to appear was not intentional or the result of conscious indifference, but was due to mistake or accident. The court never got to whether there was a meritorious defense.

To prove that the failure to appear was not intentional or the result of conscious indifference there must be “some excuse, although not necessarily a good one.” Forgetfulness alone is insufficient, but excuses that are acceptable are, for example, bad weather and misplacing the citation due to staff turnover.

Peridot’s counsel “did not see” the trial setting and no one in the office docketed the trial date. The deficiency in counsel’s affidavit was that it didn’t explain the failure to appear at trial and offered no description of circumstances that could explain why he took no notice of the trial date. Finally, the affidavit failed to address other instances showing Peridot had notice of the trial date. Peridot did not establish that its failure to appear was not intentional or a result of conscious indifference.

What does this have to do with me?

The lesson for the lawyer is obvious. What if you run a land department? You should be good to go if you have people and processes in place to assure that obligations such as delay rentals and royalty payments are made. And while you’re at it, who is paying attention to debilitating lease provisions (the ones the lessor would never even consider enforcing, until he does), such as lease termination for failure to timely pay royalties?